Sunday, February 24, 2013

On Praxeology

Austrians often get a lot of grief for Mises' "extreme a priorism" and his notion of "praxeology."

In fact, much of mainstream microeconomics is just praxeology done with mathematics: it is working out the logic of optimizing decisions. Now, if Austrians were more cognizant of that fact, it would help them to not get so much grief: They'd realize that Mises, Hayek, Friedman, Krugman, Stiglitz, Becker, etc. are all neoclassical economists.

None of the above should be taken to mean that there is no difference between the Austrian neoclassical approach and the more mainstream one.

I agree completely on the neoclassicism point, but I'd disagree a little on the "praxeology with mathematics" point. A priorism claims more than just deductive theorizing - it claims that there are fundamental axiomatic truths and that that which is derived from them is true. I don't think the economists you've listed (probably not even Hayek) make that claim.

Well said, Gene. A Chicago School economist/student whose Tumblr that I read said that praxeology can co-exist with an emphasis on empiricism. He even said that the types of mdoels that he works with utilize praxeology in a lot of ways, but add mathematical equations into the mixture.

I don't understand why it's suddenly bad for certain Austrians to use mathematics in their analyses. Where did this aversion to math come from?

Daniel and Ryan, at this point in my life, I've read a fair number of intro textbooks, and every one I have encountered presents downward sloping demand curves not as an empirical finding, but as a logical deduction from the fact of scarcity. In analyzing the prisoner's dilemma, I have never seen anyone propose that (defect, defect) is the dominant strategy because empirically we find it is dominant.

During my first semester PhD micro class, the professor (who was by no means a Popperian) repeated over and over about the importance of using comparative statics for the sake of generating empirical predictions and falsifiable hypotheses. Since comparative statics is at the core of the connection between theoretical and applied micro (at least before the rise of game theory), you better believe that this interpretation is pervasive.

Nearly all neoclassical economists still believe in Friedman 1953. They take no stance on whether or not demand curves "really" slope down. Theories are instruments used to improve predictive accuracy. This is the language they speak in.

Ryan, there is a difference between lip service and believing: I contend even Friedman never really believed Friedman 1953. I am reading Money Mischief at present, and what do I find? Him contending that if silver had continued in use as a metal, this would have stopped its price from plunging as much as it did. Hmm, a new source of demand results in a higher price than would exist without it: no call for big studies to see if this is true, just a flat statement.

Steve Landsburg, Price Theory: "Suppliers do care about the cost of feed corn, and are willing to produce fewer pork chops at a given price when that cost goes up."

I think I can shed some light on the subject. I think a lot of the grief comes not from Mises's claim that economics and praxeology are deductive, but from confusion concerning his claim that economics or praxeology can be deduced from the category of action. (The "category of action" is simply the grounding assumption---from which further deductions are made---that an actor seeks to replace a dissatisfactory situation with a satisfactory situation.) To the extent Mises claimed or implied that all of economics can be deduced from the category of action, there is understandable confusion and valid resistance to this claim.

Resistance to this claim is valid because Mises himself writes that a portion of the deductions made in economics are deduced not from the category of action, but rather from assumptions that are empirically ascertained. Here are the relevant passages from Epistemological Problems of Economics:

"The most general prerequisite of action is a state of dissatisfaction, on the one hand, and, on the other, the possibility of removing or alleviating it by taking action…Only this most general condition is necessarily implied in the concept of action. The other categorical conditions of action are independent of the basic concept; they are not necessary prerequisites of concrete action. Whether or not they are present in a particular case can be shown by experience only. But where they are present, the action necessarily falls under definite laws that flow from the categorial determinacy of these further conditions…"

"The fact that the passage of time is one of the conditions under which action takes place is established empirically and not a priori…we must [therefore] attribute to [men’s] action everything that necessarily follows from the categorial nature of time. The empirical character of our knowledge that the passage of time is a condition of any given action in no way affects the aprioristic character of the conclusions that necessarily follow from the introduction of the category of time. Whatever follows necessarily from empirical knowledge—e.g., the propositions of the agio theory of interest—lies outside the scope of empiricism."

(1976, p. 24/25)

Thus, according to Mises "Whatever follows necessarily from empirical knowledge....lies outside the scope of empiricism." What he means is that whether or not I'm holding a triangular figure is a matter to be decided empirically (it is not deduced from the category of action). But if it is empirically established that I am holding a triangular figure, then all that holds aprioristically about triangles is valid. E.g., I am also holding a figure that has three corners, etc.

In principle then, if the object of an actor's action is an object that is subject to mathematical relations (formal deductions that proceed from this empirically ascertained situation), I believe Mises, by his own standard, cannot criticize this particular procedure.

He could criticize the attempt to treat by mathematical methods a situation that is not subject to mathematical operations. Or he could maintain that the assumptions from which the mathematical operations proceed are assumptions that cannot, in principle, be empirically ascertained.

Show me an example of a neoclassical doing that when speaking to people with a formal understanding of the topic. Landsburg is a) giving intuition to an audience who doesn't understand microeconomics and b) like four standard deviations away from typical when it comes to drinking the kool-aid on this kind of thing.